Business Ownership Forms (Ch. 6 - 10) - PDF

Chapter 6: Choosing a Form of Business Ownership Chapter Contents Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. Chapter 6 Choosing a Form of Business Ownership Chapter Introduction 6-1 Different Types of Ownership Structure 6-1a Sole Proprietorships 6-1b Partnerships 6-1c Corporations 6-2 Key Considerations When Choosing Ownership Structure 6-3 Business Control and Transfer of Ownership 6-4 Taxation and Division of Proﬁts 6-4a Division of Proﬁts 6-4b Paying Taxes on Proﬁt 6-5 Legal and Financial Liability Protection 6-6 Ease of Start-Up and Administration 6-7 Co-operative Form of Ownership 6-8 Chapter Review 6-8a Chapter Summary 6-8b Exercises 6-8c Review Questions 6-8d Key Terms 6-8e Case Study Chapter 6: Choosing a Form of Business Ownership Chapter Contents Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership Chapter Introduction Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. Chapter Introduction Choosing the right ownership structure is an important decision because each of the common forms of business ownership has advantages and disadvantages. A business start- up will choose its legal ownership structure based on considerations that are speciﬁc to its situation. We will discuss those considerations in this chapter on forms of business ownership. Chapter 6: Choosing a Form of Business Ownership Chapter Introduction Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-1 Different Types of Ownership Structure Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-1 Different Types of Ownership Structure Three common forms of business ownership exist in Canada: 6-1 - Outline the three common forms of ownership structure used in Canada. Sole proprietorships Partnerships Corporations We will ﬁrst describe these common forms, and then analyze the advantages and disadvantages of each. Chapter 6: Choosing a Form of Business Ownership: 6-1 Different Types of Ownership Structure Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-1a Sole Proprietorships Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-1a Sole Proprietorships A sole proprietorship (a business that is owned (and usually operated) by one person) is a business that is owned (and usually operated) by one person. Although a few sole proprietorships are large and have many employees, most are small. Sole proprietorship is the simplest form of business ownership and the easiest to start. In most instances, the owner (the sole proprietor) simply decides to be in business and begins operations. Because sole proprietorships have few legal requirements and are not expensive to form, this is the business organization of choice for many small companies and start-ups. Entrepreneurs often choose this type of ownership because it offers a number of advantages, including: Easy and inexpensive to form Easy to dissolve Pride of ownership Flexibility of being your own boss and having control over decisions Retention of all proﬁts Relative freedom from government regulation No special taxes on the business—business income is treated as personal income of the sole proprietor Although there are many advantages to the sole proprietorship, you should also consider potential disadvantages for this type of business ownership, which include: Unlimited liability—sole personal responsibility for the debts of the business Responsibility for all losses Lack of continuity if something happens to the sole proprietor Difﬁculty obtaining capital from investors or banks—backed by assets of sole proprietor only Management skills and expertise limited to sole proprietor Large time commitment for one owner Difﬁculty attracting highly qualiﬁed employees Some of today’s largest corporations, including George Weston Limited (Loblaw and Weston Foods), Cirque du Soleil, and Bombardier started out as small—and in many cases struggling—sole proprietorships. Often entrepreneurs with a promising idea choose the sole proprietorship form of ownership so that they can get started quickly and get out easily. Beyond the Sole Proprietorship Like many others, you may decide that the major disadvantage of a sole proprietorship is the limited amount that one person can do in a workday. One way to reduce the effect of this disadvantage (and retain many of the advantages) is to have more than one owner. Chapter 6: Choosing a Form of Business Ownership: 6-1a Sole Proprietorships Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-1b Partnerships Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-1b Partnerships A person who would not think of starting and running a business alone may enthusiastically seize the opportunity to form a business partnership (an association or relationship between two or more individuals who join together to carry on a trade or business). According to the Government of Canada, a partnership is “an association or relationship between two or more individuals … that join together to carry on a trade or business.” Although it is not a legal requirement, most experts recommend that people who want to form a partnership should create a partnership agreement. Although both oral and written partnership agreements are legal, a written agreement has an obvious advantage. It is not subject to lapses of memory. Important decisions about who will make decisions, what each partner’s duties will be, the investment each partner will make, and what percentage of the company’s proﬁts each partner will receive should be included in a partnership agreement. Although there is no legal maximum on the number of partners a partnership may have, most keep the number of partners low. In fact, many partnerships have only two partners. Regardless of the number of people involved, a partnership often represents a pooling of special managerial skills and talents; at other times, it is the result of a sole proprietor taking on a partner for the purpose of obtaining more capital. A general partner (a person who shares responsibility for operating a business, and unlimited liability for the debts of the business) is a person who shares responsibility for operating the business and who assumes unlimited liability for the debts of the business. A limited partner (a person who invests money in a business but has no management responsibility or liability for losses beyond the amount they invested in the partnership) is a person who invests money in the business but has no management responsibility, and whose liability is limited to their investment. Like the sole proprietorship, a number of advantages attract entrepreneurs and would-be business owners to the partnership form of ownership. These include: Easy to form Greater availability of capital and credit, due to the increased ﬁnancial strength of more owners Combined business skills and knowledge—ideally, partnerships bring together people with complementary backgrounds rather than those with similar experience, skills, and talents Workload spread between owners Relative freedom from government regulation No special taxes on the business—business income is treated as personal income of the partners However, partnerships are the least common form of ownership due to the number of disadvantages: Unlimited liability—general partners have joint and several liability, which means they can be held personally responsible for all the partnership’s debts, regardless of who created them. You can limit your liability as a limited partner but you cannot be involved in day-to-day management of the business or make any management decisions. To get around this some people form limited liability partnerships (LLPs), wherein each partner is protected from responsibility for the acts of other partners, and each partner’s liability is limited to harm resulting from their own actions. Ontario was the ﬁrst province to allow LLPs in 1998, followed by Alberta in 1999. Today most provinces allow LLPs to operate, and they are common in accounting and law ﬁrms. Management disagreements over how to run the business, and from differences in personalities and work styles. Frozen investment—difﬁculty getting your money out of the business or exiting the partnership. For this reason, most partnership agreements have provisions for transfer of ownership and buy–sell agreements. Beyond the Partnership The main advantages of a partnership over a sole proprietorship are increased availability of capital and credit, and the combined business skills and knowledge of the partners. However, some of the basic disadvantages of the sole proprietorship also plague the general partnership. One disadvantage in particular—unlimited liability—can cause problems for a partner with substantial personal wealth, well beyond that of a sole proprietorship. A general partner who can afford to cover the debt may end up responsible for all the debt, beyond their share, due to other partners being unable to pay. A third form of business ownership, the corporation, overcomes this disadvantage. Chapter 6: Choosing a Form of Business Ownership: 6-1b Partnerships Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-1c Corporations Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-1c Corporations Perhaps the best deﬁnition of a corporation was given by Chief Justice John Marshall in a famous U.S. Supreme Court decision in 1819. A corporation, he said, “is an artiﬁcial person, invisible, intangible, and existing only in contemplation of the law.” In other words, a corporation (an artiﬁcial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts) is a separate entity created by law, with most of the legal rights of a real person. These include the right to: Start and operate a business Buy or sell property Borrow money Sue or be sued Enter into binding contracts Corporations can be either public or private. A public corporation’s (a corporation whose shares are widely held and available to the general public) shares are widely held and available to the general public. Some public companies choose to list their shares on organized stock markets (e.g., Toronto Stock Exchange) or in the over-the-counter markets (e.g., OTC Markets Group) Not all public companies’ shares are traded on a stock exchange or in the over-the-counter markets. Companies that are traded on a stock exchange or in the over-the-counter markets are called listed companies; every listed company is a public company but not all public companies are listed. A private corporation (a corporation whose number of shareholders is limited; transfer of shares to third parties is normally restricted, and shares do not trade on a recognized stock exchange) normally has a limited number of shareholders and typically places restrictions on the sale or transfer of shares to a third party (i.e., shares are not available to the general public). Examples of private corporations include small and professional corporations (e.g., your doctor or dentist is most likely a professional corporation). But not all private corporations are small; McCain Foods and Irving Oil are prime examples. Most corporations begin as private corporations. They may become public corporations to raise extra money or as an eventual exit strategy for the owners. Just as private corporations can become public corporations, public corporations can become private. A going-private transaction is often referred to as a leveraged buyout and happens when a group of investors or management of the company buys out the shares of the public shareholders. Setting Up a Corporation Unlike a real person, a corporation exists only on paper. Setting up a corporation is more difﬁcult than starting a sole proprietorship or partnership. If the business activity is primarily in only one province, it is necessary to incorporate only as a provincial company under that province’s Companies Act (or other similarly named act), although there is no restriction on a provincially incorporated company operating in other provinces or territories; it can even have most or even all of its operations in another province. A corporation can also be set up under the Canada Business Corporations Act if it is to operate in more than one province or across Canada. Either route of incorporation requires more steps than setting up a sole proprietorship or partnership. To distinguish a corporation from other forms of ownership, corporations must use Limited (Ltd./Ltée), Incorporated (Inc.), or Corporation (Corp.) at the end of the company name. This tells the customers, suppliers, and other shareholders that the owners have limited liability for the corporate obligations. Typical advantages of the corporate form of ownership include: Limited liability—a corporation is a legal entity separate from its owners, who therefore are not personally liable for its debts. It is important that although shareholders of a corporation are protected by limited liability, directors and ofﬁcers of a corporation are accountable for their actions and can be sued in cases of wrongdoing or willful negligence. Availability of capital and credit—a corporation can raise funds by selling equity/ownership in the company through shares, and it generally has greater access to bank funding. Ease of transferring ownership—shareholders of public corporations can usually easily sell their shares through the public exchanges. Perpetual life—because a corporation exists only on paper, and it is a separate entity from its owners, the death or exit of an owner does not affect its existence. Ability to attract highly qualiﬁed management—due to the relative opportunities available in a large company. Like its advantages, many of the disadvantages of the corporation stem from its legal deﬁnition as an artiﬁcial person or legal entity. These include: Difﬁculty and expense of formation—the process is complex and lawyers and accountants are usually involved. Government regulation and reporting requirements. Double taxation—a corporation must pay federal and provincial income taxes on its proﬁts, and then the after-tax proﬁt that is distributed to the shareholders (in the form of dividends) is again taxed personally in the hands of the shareholders as investment income. Lack of secrecy—public corporations are required to ﬁle annual reports. See Table 6.1 for a comparison of some of the key advantages and disadvantages of a sole proprietorship, partnership, and corporation. Table 6.1 Key Advantages and Disadvantages of a Sole Proprietorship, Partnership, and Corporation Sole Proprietorship Partnership Corporation Liability for debts Unlimited General partner Limited to personal liability has unlimited shareholder’s personal liability investment for all partners’ debts Raising capital Limited by Able to draw on Easier due to personal assets assets of all access to public partners as markets collateral Continuity of Dies with owner Difﬁcult to transfer Separate legal business ownership entity with unlimited life Government Few Few Many regulations Formation Easy Easy Difﬁcult Sole Proprietorship Partnership Corporation Income taxation Business income Business income Taxed once as taxed as personal split and taxed as business income income personal income and again as personal income if distributed to shareholders. Key Takeaway The three common forms of ownership structure are sole proprietorship, partnership, and corporation. Choosing the appropriate form will depend on the size and goals of each business. Chapter 6: Choosing a Form of Business Ownership: 6-1c Corporations Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-2 Key Considerations When Choosing Ownership Structure Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-2 Key Considerations When Choosing Ownership Structure While the advantages and disadvantages of different forms of 6-2 - Summarize the four key considerations ownership were brieﬂy mentioned in the for evaluating ownership structure. last section, the material in the rest of this chapter goes into more depth and can help you decide what type of ownership would be most appropriate for you when starting a business. If you are starting a business there is no sure-ﬁre method for deciding which form of business ownership is best, but there are four key considerations to analyze; see Table 6.2. (Table 6.2 is included within the interactive ﬁgure called “Key Considerations for Choosing an Ownership Structure.”) By understanding these key considerations, you can better analyze your situation and choose the form of business ownership most appropriate for your situation. Key Takeaway There are four key considerations when choosing a form of business: Business ownership and control Taxation and Treatment of proﬁts Legal and ﬁnancial liability Ease of start-up and administration When examining these considerations one by one, multiple ownership structures may appear to be a good ﬁt. Examining your business goals against all four of the key considerations will help you select the best form of ownership. One other very important consideration is often overlooked. Discussions about the corporate form of ownership can be misleading, because when we think of corporations we think of large, established businesses—but many owners of smaller businesses choose to incorporate for some of the reasons listed above. When you are a small corporation the advantages and disadvantages listed previously are primarily potential rather than real. Most of them typically occur as the business grows. We will cover this as we examine each consideration. Chapter 6: Choosing a Form of Business Ownership: 6-2 Key Considerations When Choosing Ownership Structure Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-3 Business Control and Transfer of Ownership Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-3 Business Control and Transfer of Ownership The person, or people, starting a business will often possess a clear 6-3 - Determine the most appropriate vision of what they want the business to ownership structure for business control and look like in the future. Some owners ease of transferring ownership. might want a small, simple business they run by themselves. Others might plan for explosive growth and hope to become a global brand someday. This vision will affect the choice of ownership structure, because the form of business ownership affects how much control the owners have, as well as the ease of transferring ownership to others—an important consideration if you hope to sell the business in the future. Watch this video to learn more about these often overlooked issues when selecting a form of business ownership. Often, business owners who are responsible for controlling a business ignore the possibility of management disagreements. The possibility is real and is an important factor to consider when choosing a form of ownership. For example, what happens to a partnership if one of the partners wants to withdraw more money from the business than the other partner(s) do? Conﬂict within corporations is also common—especially when control of the business becomes an issue. In many cases, management disagreements and conﬂict occur in partnerships and corporations because of the human factor. Business owners, employees, managers, and executives with egos, ambitions, and money on the line are especially susceptible to friction. When the people involved in a business begin to disagree about decisions, policies, or ethics, distrust may build and get worse as time passes, often to the point where the business suffers until the conﬂict can be resolved. Key Takeaway Sole proprietorships (or one-person corporations) offer the most control but make transfer of ownership very difﬁcult. Partnerships and corporations require shared control of the business because there are usually multiple owners. Corporations allow for easy transfer of ownership, making them the best choice for businesses intending to attract investment capital by selling shares in the company. However, ease of ownership transfer and the ability to attract ﬁnancing are both more likely as the business grows, because when the corporation is small and the shares are privately held, the market for shares is small. Chapter 6: Choosing a Form of Business Ownership: 6-3 Business Control and Transfer of Ownership Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-4 Taxation and Division of Proﬁts Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-4 Taxation and Division of Proﬁts An important goal of every business is to make a proﬁt. Proﬁt is what remains 6-4 - Determine how taxation and division of after all business expenses have been proﬁts affect the choice of ownership deducted from sales revenue. The form structure. of business affects how proﬁts can be divided and how they will be taxed. We will start by discussing division of proﬁts and will then take a look at how those proﬁts are taxed. Chapter 6: Choosing a Form of Business Ownership: 6-4 Taxation and Division of Proﬁts Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-4a Division of Proﬁts Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-4a Division of Proﬁts Proﬁts are divided differently depending on the type of business. Click on each form of business for an example. Chapter 6: Choosing a Form of Business Ownership: 6-4a Division of Proﬁts Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-4b Paying Taxes on Proﬁt Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-4b Paying Taxes on Proﬁt The type of tax treatment is based on the form of business you have chosen. There are two basic methods for tax treatment of proﬁts, pass-through taxation (occurs when an owner’s share of business proﬁts is reported on their individual tax return, as in an unincorporated business (sole proprietorship or partnership)) and corporate (dual) taxation (occurs when proﬁts of a business are taxed at the entity level before proﬁts are distributed to owners; distributions are then reported on the owners’ individual tax returns as dividends and are taxed a second time). Pass-Through Taxation: Proﬁts from the business pass through the business, straight to the owners. The owners report their share of proﬁts (or losses) in the business on their individual tax returns. Sole proprietorships and partnerships both feature pass-through taxation because the law does not separate the business from the owners in unincorporated businesses. Therefore, business income in sole proprietorships and partnerships is treated as personal income. In a partnership the people involved in the business agree on the amount of proﬁt each owner should receive, and the details about how proﬁts should be divided should be spelled out in the partnership agreement. Corporate (Dual) Taxation: Because a corporation is a separate legal entity, it must pay taxes on company proﬁts at a separate corporate rate. This can lead to double taxation because when after-tax proﬁts are distributed to company owners that money gets taxed again as dividend income. Dividend distributions must be approved by the board of directors of the corporation. Once declared and paid out to shareholders, these dividends are taxable as personal income and must be reported to the Canada Revenue Agency on their personal income tax returns. All corporate proﬁts are taxed twice regardless of the size of the business, but it is important to note that the federal and provincial governments offer lower small-business tax rates that reduce the burden for smaller corporations. Let us look at a few examples to illustrate pass-through versus corporate taxation. Why would any company choose to be a corporation and face double taxation? Corporations offer other advantages such as better ability to attract investment capital as they grow. Corporations can deduct certain business expenses that other forms of business cannot, which may signiﬁcantly lower the amount of money subject to taxes. Depending on the level of proﬁts, corporate rates may be lower than individual tax rates. This is one of the most important reasons, and sometimes the sole reason, why many business owners choose to incorporate—the Canadian and most provincial governments offer lower small-business tax rates to Canadian-controlled private corporations (CCPCs). This often amounts to a corporate tax rate that is lower than what the owner would pay at their personal tax rate. If the owner then takes dividends from the business, these are also taxed at a preferential rate, which negates the effect of the dual taxation. Corporations do not have to distribute proﬁts at the end of the year. They can invest after-tax proﬁts back into the business to drive growth. This avoids the problem of double taxation and potentially increases the long-term value of the owners’ shares. Key Takeaway Business proﬁts are divided based on the form of business ownership. The two primary forms of business taxation are pass-through or corporate taxation. After taxes are paid, the proﬁts earned by sole proprietorships and partnerships are taxed as the personal income of the owner. Partnerships can divide proﬁts by any method agreed upon by the owners. Because a corporation is a separate legal entity, it must pay taxes on company proﬁts at a corporate rate. This can lead to double taxation because after-tax proﬁts may be distributed to company owners and that money gets taxed again as dividend income. While corporate proﬁts can be subject to double taxation, for Canadian controlled private corporations, the corporate rate may be lower than the owners’ personal rates. Chapter 6: Choosing a Form of Business Ownership: 6-4b Paying Taxes on Proﬁt Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-5 Legal and Financial Liability Protection Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-5 Legal and Financial Liability Protection The concept of legal and ﬁnancial liability is one of the most important 6-5 - Identify the liability exposure of the considerations when forming a owners of different businesses. business. Business activities can lead to unplanned debts and legal liabilities for which the business owners can be held personally liable. Typically, one of the biggest disadvantages for sole proprietorships and general partnerships is unlimited liability. Unlimited liability (a legal concept that holds a business owner personally responsible for all the debts of the business) is a legal concept that holds a business owner personally responsible for all the debts of the business, meaning that this liability is not limited to what the business can cover—it extends to the personal assets of the owner. Fortunately, certain forms of business ownership including limited partnerships (where there is at least one general partner, but some partners may be limited partners) and corporations provide limited liability protection for business owners. Limited liability (a feature that limits each owner’s ﬁnancial liability to the amount of money that they have invested in the business) limits each owner’s ﬁnancial liability to the amount of money that they have invested in the business, but in the case of a partnership limited partners cannot take part in the management of the business. Key Takeaway The concept of legal and ﬁnancial liability is one of the most important considerations when forming a business. Sole proprietorships and general partnerships can expose business owners to unlimited personal liability for company debts and legal judgments. Limited liability partnerships and corporations provide limited-liability protection, which makes them an attractive choice for business owners who wish to limit their risk and protect their personal assets. However, often the advantages of corporations are obtained as the business grows and are not evident when the business is just starting out. For example, although limited liability is technically an advantage of a corporation, because lenders know that they can access only the assets of the corporation to satisfy debts they are often less willing to loan money to a young business unless the owner guarantees the loan with personal assets. This guarantee extends the liability beyond the corporation and therefore it is technically no longer “limited.” As the business grows and is more able to satisfy its obligations, this condition of personal guarantees is less likely to occur. Chapter 6: Choosing a Form of Business Ownership: 6-5 Legal and Financial Liability Protection Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-6 Ease of Start-Up and Administration Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-6 Ease of Start-Up and Administration The legal requirements for setting up a sole proprietorship or partnership 6-6 - Determine the most appropriate business are generally simple and business structure for ease of start-up and inexpensive. Typically, establishing a administration. corporation is more complex and more expensive. Sole proprietorship: Simplest and least expensive to form. Register business name and obtain business licences or permits (see Figure 6.1). Figure 6.1 Sole Proprietorship Partnership: Easy to form. Register business name and obtain business licences and permits. While a written partnership agreement is not required, a written agreement can help specify the duties and authority of each partner, in addition to mandating how proﬁts will be split and how changes in ownership might take place. The partnership agreement is an internal document and does not need to be ﬁled with provincial or federal agencies (see Figure 6.2). Figure 6.2 Partnership Corporation: Moderately difﬁcult to form, plus additional administration requirements. In addition to registering business name and obtaining business licences and permits, owners must ﬁle articles of incorporation with the provincial or federal authorities. The articles include details such as the amount of shares to be issued, rights and privileges of shareholders, and the purpose of the corporation. Finally, the incorporators and original shareholders must meet to adopt corporate bylaws and elect a board of directors, which will set company goals and provide governance for the corporation. The board in turn appoints ofﬁcers to run the company day by day. Corporations must hold an annual shareholders’ meeting. This model of governance and the requirement for annual meetings are the key administrative differences between corporations and other forms of business. Smaller corporations are, however, not as complex and costly to form as larger corporations or public corporations, and the government tends to support smaller businesses to help them grow instead of heavily regulating them (see Figure 6.3). Figure 6.3 Corporation Table 6.3 summarizes the main similarities and differences of each form of ownership with respect to the key considerations. Table 6.3 Putting It All Together Sole Proprietorship Partnership Corporation Control Complete control Shared control Formal governance (less so in a small private corporation) Transfer of Difﬁcult Difﬁcult Easy in a public ownership corporation (less so in a small private corporation) Taxation Pass-through, Pass-through, Corporate (double treated as treated as taxation-once at Sole Proprietorship Partnership Corporation personal income personal income the corporate level and again as personal income when dividends are paid to shareholders) BUT small business rates apply to CCPCs Liability Unlimited Unlimited (except Limited (unless for limited small corporation partners and in signs personal LLP) guarantees) Division of proﬁts 100% to the Shared equally After-tax proﬁts owner unless speciﬁed distributed to in partnership shareholders and agreement based on the number of shares a shareholder owns Ease of start-up Easy Easy Moderate to and difﬁcult (if public administration corporation) Requirements can vary from province to province. Online services can be used to complete the business setup process quickly and easily. Consulting a lawyer is typically recommended if multiple business owners or investors are involved. This will add to the cost of business setup but is worth it to ensure that documents are ﬁled properly and that agreements are clear and complete. In addition, an accountant can help the business comply with various provincial and federal tax requirements. Key Takeaway The basic start-up and administration requirements for the sole proprietorship and partnership forms of business are simple and inexpensive. Corporations are more complicated and expensive to establish. For example, corporations have the most start-up requirements, have a distinct governance structure, and are the only form of ownership that requires an annual shareholders’ meeting. Even for ownership structures that are easy to start and administer it is beneﬁcial to consult a lawyer, especially if the business has multiple owners, partners, or investors. Chapter 6: Choosing a Form of Business Ownership: 6-6 Ease of Start-Up and Administration Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-7 Co-operative Form of Ownership Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-7 Co-operative Form of Ownership A co-operative is a special type of legally incorporated business that is 6-7 - Understand the co-operative form of owned by an association of members ownership structure. that come together to satisfy common needs—whether economic, social, cultural, environmental, or a combination. You may be surprised to know that some of the businesses you are familiar with are organized as co-operatives. Co-operatives serve a wide variety of functions, but generally ﬁt one of the following four types: A consumer co-op (a co-op that provides products or services to its members) that provides products or services to its members; examples include MEC (Mountain Equipment Co-op), The Co-operators Group, and Desjardins. A producer co-op (a co-op that markets goods or services produced by its members or reduces costs through group purchasing) that markets the goods or services produced by its members, and/or helps to reduce the cost of inputs and administration through group purchasing; examples include Home Hardware and Ocean Spray. A worker co-op (a co-op owned and operated by its employees to provide employment and limited liability) that is owned and operated by its employees to provide employment and limited liability unlike creating a partnership; examples include London Brewing Co-operative and Planet S Magazine. A multi-stakeholder co-op (a co-op that includes more than one membership group) that includes more than one membership group and takes into account the needs of these many different kinds of members; examples include Stocksy United and Common Ground Co-operative. Co-operatives are community-focused businesses that are value-driven by nature. Co- operatives around the world share the same seven principles, as deﬁned by the International Co-operative Alliance(ICA). As indicated on the Ontario Co-operative Association website, co-operatives are driven by values and not simply proﬁt, and share these internationally agreed upon principles: 1. Voluntary and open membership: Co-operative membership is available to all, without discrimination of any kind including gender, social, racial, political, or religious discrimination. 2. Democratic member control: Typically, each member has a vote. 3. Member economic participation: Members equitably contribute to their co- operative’s capital. 4. Autonomy and independence: When co-operatives enter into agreements with third parties, they make sure that the terms of the agreement both maintain their autonomy and ensure that members maintain democratic control. 5. Education, training and information: Co-operatives provide training and education to their members and inform the general public about the beneﬁts of co-operation. 6. Co-operation among co-operatives: Co-operatives believe that by working together with other co-operatives, the co-operative movement is strengthened and their members are better served. 7. Concern for community: Co-operatives contribute to the sustainable development of their communities. Key Takeaway Co-operatives are a special type of legally incorporated business that is owned by members who come together to satisfy common needs. Co-operatives serve a variety of functions but are generally of four main types: consumer co-ops, producer co-ops, worker co-ops, and multi-stakeholder co-ops. Cooperatives are community- focused and values-driven and share seven principles that guide their actions. Chapter 6: Choosing a Form of Business Ownership: 6-7 Co-operative Form of Ownership Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-8 Chapter Review Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 6-8 Chapter Review 6-8a Chapter Summary There are three common forms of ownership structure: sole proprietorship, partnership, and corporation. Choosing the appropriate form will depend on the size and goals for each business. Choosing the right ownership structure is an important decision because each of the common forms of business ownership has advantages and disadvantages. A business start- up will choose an ownership structure based on considerations speciﬁc to their situation. These considerations include: Business control and transfer of ownership Taxation and division of proﬁts Legal and ﬁnancial liability Ease of starting up and administration When examining these considerations one by one, multiple ownership structures may appear to be a good ﬁt. Examining your business goals against all four of the key factors will help you select the best form of ownership. The ﬁrst consideration is business control and transfer of ownership. Sole proprietorships offer the most control but make transfer of ownership very difﬁcult. Partnerships and corporations require shared control of the business because there are usually multiple owners. Corporations allow for easy transfer of ownership, making them the best choice for businesses intending to attract investors and investment capital by selling shares in the company. Initially smaller, private corporations may have more difﬁculty selling shares and raising capital but will typically gain these advantages as they grow. The second consideration is taxation and division of proﬁts. Sole proprietorships and corporations always distribute proﬁts based on percentage of ownership. Partnerships can divide proﬁts by any method agreed upon by the owners. The two primary forms of business taxation are pass-through or corporate taxation. While corporate proﬁts can be subject to double taxation, this may be offset by other advantages of corporate ownership, and tax rates for small, private corporations can be very attractive. The third consideration, legal and ﬁnancial liability, is one of the most important considerations when forming a business. Sole proprietorships and partnerships can expose business owners to unlimited personal liability for company debts and legal judgments. Limited partners cannot be involved in management of the business. Corporations provide limited-liability protection, which makes them an attractive choice for business owners who wish to limit their risk of losing their personal assets. Owners of small corporations may be required to sign personal guarantees for loans, which increase the personal liability of the owners. The ﬁnal consideration is ease of starting up and administration. The basic start-up and administration requirements for the sole proprietorship and general partnership forms of business are simple and inexpensive. A corporation is more complicated and expensive to establish. For example, a corporation has a distinct governance structure, and is the only form of ownership that requires an annual shareholders’ meeting. Even for ownership structures that are easy to start and administer it is beneﬁcial to consult a lawyer, especially if the business has multiple owners, partners, or investors. Co-operatives are a special type of legally incorporated business that is owned by members who come together to satisfy common needs. Co-operatives serve a variety of functions but are generally of four main types: consumer co-ops that provide products and services to members, producer co-ops that come together for greater marketing or purchasing power, worker co-ops that provide employment to members, and multi-stakeholder co-ops that meet a variety of needs. Cooperatives are community-focused and values-driven and share seven principles that guide their actions. Chapter 6: Choosing a Form of Business Ownership: 6-8 Chapter Review Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-8b Exercises Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. Chapter Review 6-8b Exercises Use the internet, magazines, newspapers, books, and personal experiences to complete the following exercises. 1. Imagine you want to become a sole proprietor and run your own small business. Visit the Government of Canada website for information on how to start your business. Do you need to register with your province or territory? Do you require any permits or licences? What challenges do you anticipate you would face as a sole proprietor? 2. A good friend approaches you with an idea for a start-up business. You must now determine if you should establish a partnership or incorporate your business. Make a list of advantages and disadvantages for both scenarios. Which ownership structure will be most beneﬁcial for your business? 3. Management disagreements over how to run the business, conﬂicting personalities, and differences in work styles are all factors that can create challenges in a partnership. Brainstorm ways in which partners can attempt to prevent these issues from occurring. 4. Research corporation tax rates for the province you live in, including small business tax rates. How do they compare to the rest of Canada? 5. If you are starting a business, there is no sure-ﬁre method for deciding which form of business ownership is best. Of the four key considerations discussed in the chapter, which takes highest priority for you? 6. Research some of the different co-operatives listed in this chapter. Take a look at their websites and see if you can spot the seven principles in action. Chapter 6: Choosing a Form of Business Ownership: 6-8b Exercises Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-8c Review Questions Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. Chapter Review 6-8c Review Questions 1. Deﬁne the three main forms of ownership structure used in Canada. What are the advantages and disadvantages of each? 2. Differentiate between a general partner and a limited partner. 3. What are the legal rights of a corporation? 4. Differentiate between a public and private corporation. 5. Discuss key considerations for choosing an ownership structure. 6. Differentiate between pass-through taxation and corporate (dual) taxation. 7. Why would any company choose to be a corporation and face double taxation? 8. Differentiate between limited and unlimited liability. 9. Discuss ease of start-up and administration for each type of ownership structure. 10. Explain how proﬁts are divided for each type of ownership structure. 11. Discuss the differences between traditional incorporated businesses and co- operatives. Chapter 6: Choosing a Form of Business Ownership: 6-8c Review Questions Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-8d Key Terms Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. Chapter Review 6-8d Key Terms consumer co-op (a co-op that provides products or services to its members) corporate (dual) taxation (occurs when proﬁts of a business are taxed at the entity level before proﬁts are distributed to owners; distributions are then reported on the owners’ individual tax returns as dividends and are taxed a second time) corporation (an artiﬁcial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts) general partner (a person who shares responsibility for operating a business, and unlimited liability for the debts of the business) limited liability (a feature that limits each owner’s ﬁnancial liability to the amount of money that they have invested in the business) limited partner (a person who invests money in a business but has no management responsibility or liability for losses beyond the amount they invested in the partnership) multi-stakeholder co-op (a co-op that includes more than one membership group) partnership (an association or relationship between two or more individuals who join together to carry on a trade or business) pass-through taxation (occurs when an owner’s share of business proﬁts is reported on their individual tax return, as in an unincorporated business (sole proprietorship or partnership)) private corporation (a corporation whose number of shareholders is limited; transfer of shares to third parties is normally restricted, and shares do not trade on a recognized stock exchange) producer co-op (a co-op that markets goods or services produced by its members or reduces costs through group purchasing) public corporation’s (a corporation whose shares are widely held and available to the general public) sole proprietorship (a business that is owned (and usually operated) by one person) unlimited liability (a legal concept that holds a business owner personally responsible for all the debts of the business) worker co-op (a co-op owned and operated by its employees to provide employment and limited liability) Chapter 6: Choosing a Form of Business Ownership: 6-8d Key Terms Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 6: Choosing a Form of Business Ownership: 6-8e Case Study Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. Chapter Review 6-8e Case Study Indigenous Partnerships Indigenous peoples have cultivated business relationships with newcomers and non- Indigenous Canadians for centuries. Historically, Indigenous peoples were crucial partners in the fur trade. Many Indigenous people continue to engage in business relationships with non-Indigenous Canadians today. An estimated 43,000 Indigenous-owned businesses operate in Canada, and these businesses are diverse across regions, industries, markets, and size, and take many forms. It is essential that all Canadians work toward reconciliation by building reciprocal relationships with Indigenous peoples and the land. The Canadian Council for Aboriginal Business (CCAB) is an organization that encourages businesses to build these reciprocal relationships with Indigenous people and communities. The CCAB’s Progressive Aboriginal Relations (PAR) certiﬁcation program has become the foremost social responsibility program related to Indigenous peoples and communities. Businesses certiﬁed under the PAR program have demonstrated that they are good business partners, good places to work, and committed to prosperity in Indigenous communities. Speciﬁcally, the program encourages leadership actions that drive positive Indigenous relations within an organization, equitable employment of Indigenous people, development of positive relationships with Indigenous-owned businesses, and positive and progressive community engagement. Businesses do not have to be large to participate in the PAR program. The cultivation of ongoing reciprocal relationships and investment in Indigenous communities is the key to success in partnering with Indigenous peoples and Indigenous- owned businesses. Business deals that serve only short-term (mostly ﬁnancial) gains are becoming obsolete. Due to legal precedents that have recognized the land rights of Indigenous peoples, resource extraction businesses usually have departments dedicated to Indigenous relations. Yet, positive business relationships with Indigenous peoples and communities extend well beyond the resource sector. A survey conducted by Leger and Sodexo Canada found that 81 percent of Canadians agree that corporations should include Indigenous businesses in their supplier networks. This ﬁgure speaks to an increasing public awareness of the need for reconciliation. CCAB President and CEO J. P. Gladu calls for Canadian businesses to take action: “That’s about ensuring that our communities have access to all the business tools and opportunities to grow an economy so that we're managing wealth, rather than managing the poverty that we have been managing for a very long time.” Reconciliation requires all Canadians to learn about the truth of past harm and to understand ongoing systemic discrimination against Indigenous peoples. There are over 600 distinct First Nations in Canada, and Métis peoples and Inuit represent separate and diverse communities as well. As there are many Indigenous cultures it can be a process to discover what the traditions and protocols are for the speciﬁc situation, but it is important to respect the speciﬁc cultural traditions and protocols of the individuals or communities involved in all business relationships. One action that businesses can readily incorporate into meetings and conferences is a territory or land acknowledgment. This protocol involves recognizing the traditional territory of the Indigenous peoples who lived on the land before colonization and who continue to share the land with Canadians and other newcomers. Acknowledging the traditional territories and that Indigenous peoples continue to reside on the land reinforces enduring participation in business also in cities and towns across Canada—not just on reserves and in Indigenous communities. Indeed, Gladu suggests that “with over half of our population now living in urban centres, there’s a strong Indigenous business presence that can be tapped into.” The Aboriginal Business Match (ABM) is an Indigenous-driven initiative that brings communities and all sizes of businesses together to ﬁnd deals that are mutually beneﬁcial for Indigenous and non-Indigenous groups. ABM exchange events are held across Canada and the United States. These events operate as a series of 20-minute pre-screened meetings held at conference centres in metropolitan areas. During the 2016 ABM shows, one in ﬁve delegate groups made a deal on the conference ﬂoor. More than 90% of delegates stated that they developed key contacts that may lead to future business deals. The next ABM meeting is scheduled in a location near to you in a few months. You have been hired by a local ﬁrm to set up some parameters on how best to interact at an ABM meeting. You represent a business that is looking to develop a relationship with an Indigenous organization or community in your geographic area. Your job is to establish basic guidelines on partnering and developing joint ventures and to decide how best to structure this relationship moving forward. Whether your relationship results in a formal legal partnership or you just partner with an Indigenous organization or community to work together on a common goal, developing ongoing relationships with Indigenous organizations and communities is a positive step forward. Case Sources: https://www.tdslaw.com/publication/doing-business-with-ﬁrst-nations/; https://www.ccab.com/about- ccab/; http://business.ﬁnancialpost.com/news/partnerships-spur-ﬁrst-nations-business-growth; https://aboriginalbusinessmatch.com/how-it-works/; https://www.northernontariobusiness.com/industry- news/aboriginal-businesses/aboriginal-business-match-takes-place-in-sudbury-this-august-911652. Chapter 6: Choosing a Form of Business Ownership: 6-8e Case Study Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process Chapter Contents Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. Chapter 7 Understanding the Management Process Chapter Introduction 7-1 The Four Functions of Management 7-1a Planning: Setting Goals 7-1b Organizing the Enterprise 7-1c Leading and Motivating 7-1d Controlling 7-2 Types of Managers 7-2a Levels of Management 7-2b Areas of Management Specialization 7-2c Non-traditional Management Roles 7-3 Key Skills of Successful Managers 7-3a The Mix of Skills Required for Effective Management 7-4 Styles of Leadership 7-5 Managerial Decision Making 7-5a Making Quality Decisions 7-6 Using Our Decision-Making Skills to Achieve Success 7-6a SWOT Analysis 7-6b Assessing Strategic Factors Using SWOT 7-7 Chapter Review 7-7a Chapter Summary 7-7b Exercises 7-7c Review Questions 7-7d Key Terms 7-7e Case Study Chapter 7: Understanding the Management Process Chapter Contents Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process Chapter Introduction Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. Chapter Introduction When you buy something online or at the store, it is easy to forget how much effort went into getting that product to you. Watch the following video for an example of what is going on behind the scenes when you make a simple purchase. Chapter 7: Understanding the Management Process Chapter Introduction Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-1 The Four Functions of Management Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-1 The Four Functions of Management Business is complex. For example, when starting a new business you need 7-1 - Summarize the four basic management more than just an idea. You need to functions. develop a strategy of how your business will operate and be successful. This includes planning your ﬁnancial strategy —for example, how much start-up capital you need, and how you are going to ﬁnance it. You will also need to plan your marketing strategy. This would include understanding who your potential customers are, what products they want, what prices they are willing to pay, and how you are going to promote the product so that they know it exists. These are only a few of the considerations you need to make for your new business to have a better chance of being successful. How can all of these activities be managed at once? The ﬁrst step is to understand the four key functions of management (coordinating people and other resources to achieve the goals of an organization) : Planning Organizing Leading and motivating Controlling How well managers perform these functions determines whether a business is successful. Understanding them can serve as a roadmap that tells a manager which functions they execute well, and which need more attention. See the following activity for a description of the four functions. All the activities within the process of management—planning, organizing, leading, and controlling—are highly integrated. They form a tightly integrated cycle of thoughts and actions. They are highly interdependent and are performed in such a way that it is difﬁcult, if not impossible, to separate them. Managers who can perform these functions well are extremely valuable to an organization because they create order from what could become chaos. This helps the organization reach its goals, which ultimately should beneﬁt its employees and customers. Chapter 7: Understanding the Management Process: 7-1 The Four Functions of Management Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-1a Planning: Setting Goals Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-1a Planning: Setting Goals Planning (establishing organizational goals and deciding how to accomplish them) is establishing organizational goals, deciding how to accomplish them, and determining what resources will be needed to achieve the goals. The plans developed must be consistent with the organization’s vision statement. A vision statement ( a clear and concise outline of an organization’s values and goals that it would like to achieve) is a clear and concise outline of an organization’s values and goals that it would like to achieve—the desired future. The planning process itself is also highly integrative. Planning has different levels—the main ones being strategic, tactical, and operational—but they must all work together. Strategic planning is broad based and determines the goals and plans for the entire organization, typically for one to ﬁve years. Then, at the tactical level, each functional area determines its own goals and plans, which enables that area to fulﬁll its role in achieving the overall strategic plan, typically less than one year. Finally, at the operational level, each unit within each functional area determines its goals and plans to implement those at the next higher level, typically the day-to-day operations. Additionally, many companies develop contingency plans, the “what if” plans. Effective contingency plans allow organizations to respond to situations that would render their current plans unsuitable. Since the future has no guarantees, managers must make contingency plans. By having contingency plans developed in advance, managers can properly respond to situations as they arise. If no contingency plans are in place, managers may have to make decisions in a more reactive way without the beneﬁt of having all the relevant information, resulting in potential disastrous outcomes. Organizations begin the planning process by developing a mission statement (a clear, concise articulation of how the company intends to achieve its vision—how it is different from its competition and the keys to its success) , which is a clear, concise articulation of how the company intends to achieve its vision—how it is different from its competition and the keys to its success. The strategic planning process (establishing an organization’s major goals and objectives and allocating resources to achieve them) involves establishing an organization’s major goals, then allocating resources to achieve them. The strategic planning process is a broad guide for the company and is usually developed by top management. From there, speciﬁc divisions and departments create their own goals and plans to help accomplish the strategic plan. Every member of an organization—the chief executive ofﬁcer, the head of a department, an operating employee at the lowest level—has a set of goals that they hope to achieve. Most organizations develop several types of plans—strategic, tactical, operational, and contingency (see Table 7.1 and Figure 7.1). Figure 7.1 The Strategic Planning Process Table 7.1 Types of Strategic Plan Strategic Tactical Operational Contingency Broad guide Smaller- Designed Outline of for major scale plan to alternative policy setting to implement courses of implement tactical action if Designed to strategic plans other plans achieve plan are long-term Day-to-day disrupted goals—one Plan is one focus or non- to ﬁve years year or less effective Deals with Set by board May be how to Used in of directors updated accomplish conjunction and top periodically speciﬁc with management objectives strategic, Easier to tactical, change and than operational strategic plans plans Chapter 7: Understanding the Management Process: 7-1a Planning: Setting Goals Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-1b Organizing the Enterprise Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-1b Organizing the Enterprise After goal setting and planning, the manager’s second major function is organizing (grouping resources and activities to accomplish some end result in an efﬁcient and effective manner). Click through the following example to see why managers are constantly organizing as a company grows. Chapter 7: Understanding the Management Process: 7-1b Organizing the Enterprise Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-1c Leading and Motivating Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-1c Leading and Motivating Leading (the process of guiding others toward the achievement of organizational goals) is the process of guiding others toward the achievement of organizational goals, while motivating (the process of providing incentives for people to work in the best interests of an organization) is providing reasons for people to work in the best interests of an organization. They are concerned with the human resources in an organization—usually the most important resource an organization has. Given their importance, leading and motivating are critical activities; together they are known as directing (the combined processes of leading and motivating) (also called guiding), which is the combined processes of leading and motivating. Different people do things for different reasons; that is, they have different motivations. Some are interested primarily in earning as much money as they can. Others may be driven by opportunities to get promoted. Part of a manager’s job, then, is to determine what factors motivate workers and to provide proper incentives to encourage effective performance. The style and tactics managers use to inﬂuence their team toward a common goal is the essence of leadership. Later in this lesson we explore leadership styles in detail. Chapter 7: Understanding the Management Process: 7-1c Leading and Motivating Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-1d Controlling Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-1d Controlling Controlling (measuring results against goals and making corrections when needed) is the process of evaluating and regulating ongoing activities to ensure that goals are achieved. To see how controlling works, consider a rocket launched by NASA to place a satellite in orbit. Do NASA personnel simply ﬁre the rocket and then check back in a few days to ﬁnd out whether the satellite is in place? Of course not. The rocket is monitored constantly, and its course is regulated and adjusted as needed to get the satellite to its destination. Watch this video to learn about the speciﬁc steps of the control function. Key Takeaway The four functions of management are planning, organizing, leading and motivating, and controlling. Managers who perform these functions well are extremely valuable to an organization because they help the organization meet its objectives effectively and efﬁciently. Chapter 7: Understanding the Management Process: 7-1d Controlling Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-2 Types of Managers Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-2 Types of Managers As an organization grows it needs an increasing number of managers. Those 7-2 - Identify the various levels of managers need to be organized in a management. way that best helps the organization achieve the goals identiﬁed in the planning stage. Managers can be classiﬁed in two ways: According to their level within an organization According to their area of management In this section we use both perspectives to learn about the various types of managers. Chapter 7: Understanding the Management Process: 7-2 Types of Managers Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-2a Levels of Management Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-2a Levels of Management For the moment, think of an organization as a three-storey structure. Each storey corresponds to one of the three general levels of management: top managers (an upper- level executive who guides and controls an organization’s overall strategy and resources to accomplish its vision) , middle managers (a manager who implements the strategy and major policies developed by top management) , and front-line managers (a manager who coordinates and supervises the activities of operating employees (those with no employees reporting to them)). Sometimes the three levels are referred to as the strategy group, the tactical group, and the operations group. These titles are based on their responsibilities. Click on each level of management to see a description and common titles for that level. Chapter 7: Understanding the Management Process: 7-2a Levels of Management Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-2b Areas of Management Specialization Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-2b Areas of Management Specialization Organizational structure can also be divided into areas of management specialization. The most common areas are ﬁnance, operations, marketing, and human resources. These are commonly called functional areas because they are groups of employees who specialize in a particular business function. Their responsibilities generally determine the management level. For example, the Chief Financial Ofﬁcer would be in top management (the strategy group), whereas the ﬁnancial manager would most likely be at the middle level (the tactical group). Managers of speciﬁc areas of ﬁnance, for example business loans, would be at the lower level (operations group). Click on each function in the following image to learn more about specialized types of managers who might work within that area, including ﬁnancial managers (primarily responsible for an organization’s ﬁnancial resources) , operations managers (manages the systems that convert resources into goods and services) , marketing managers (responsible for facilitating the exchange of products between an organization and its customers or clients) , human resources managers (charged with managing an organization’s human resources programs) , and administrative managers (a manager who is not associated with any speciﬁc functional area but provides overall administrative guidance and leadership). Chapter 7: Understanding the Management Process: 7-2b Areas of Management Specialization Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-2c Non-traditional Management Roles Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-2c Non-traditional Management Roles It is important to note that these management levels and areas are traditional ways of classifying management. In some cases, managers are squeezed into multiple roles or are reorganized into different roles every few years. This is especially true at the middle- and front-line management levels. In addition, some organizations do not organize employees according to traditional functional areas such as operations, marketing, and human resources. Rather, they organize employees into project and product teams that work on speciﬁc initiatives for the company. In these cases, identifying the level and area of a particular manager may be difﬁcult. For example, at clothing manufacturer Gore, makers of Gore-Tex, there are no traditional managers or organizational charts, even though it has approximately $4 billion USD in annual revenues with more than 11,000 employees, called associates, in more than 25 countries. Many companies see non-traditional management structures as a key to empowering employees and staying responsive to market needs. Key Takeaway Managers are classiﬁed by their level and area of specialization in the organization. The nature of a manager’s job is directly related to their level and area of specialization. Classiﬁcation of managers in this way is an example of the organizing function of management. Chapter 7: Understanding the Management Process: 7-2c Non-traditional Management Roles Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. © 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. Chapter 7: Understanding the Management Process: 7-3 Key Skills of Successful Managers Book Title: Business, Second Canadian Edition Printed By: Adriana Noey ([email protected]) © 2023 Cengage Learning Canada, Inc. ALL RIGHTS RESERVED., Cengage Learning Canada, Inc. ALL RIGHTS RESERVED. 7-3 Key Skills of Successful Managers Managers who can effectively plan, organize, lead, and control are

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